Exploitation of the capital gains tax system is costing the Treasury £1
billion a year, David Cameron has said.

The Prime Minister highlighted tax “evasion” to justify his controversial plans to increase CGT in next week’s Budget.

He told Jeremy Vine on BBC Radio 2: “There is a problem at the moment. We are finding that a lot of people turn income into capital to evade the tax system, and we are losing about £1 billion because of that."

Many accountants have questioned how easy it is for most people to shift income into capital to avoid paying CGT. Some argue that increasing the rates will merely encourage people to hold back from selling assets, causing the Treasury's tax revenues to actually fall.

Mr Cameron also sent more hints that small investors who hold assets for long periods will be given concessions next week.

The Coalition is planning to increase capital gains tax from 18 per cent to “closer” to the 40 per cent higher rate of income tax. The tax increase will only be levied on so-called non-business assets such as shares, second homes and buy-to-let properties.

There has been a widespread public backlash against the plans and several senior Conservative MPs including David Davis and John Redwood have openly attacked the proposal. More than 17,400 readers of The Daily Telegraph have signed a petition against the planned rise, saying many savers with modest incomes but a lifetime of prudent savings will be hit the hardest.

Mr Cameron said: "This is not about punishing savers.”

Changes will be made in “a reasonable and fair way" he said, adding: “I didn’t come into politics to put punitive rates of taxation on savers and people who do the right thing.”

His comments will give hope to the millions who have held shares and properties for many years as source of income for their retirement.

Figures from HM Revenue & Customs indicates that more than half of all the people who pay capital gains tax every year have held on to their assets – be it shares, or property – for at least eight years.

These statistics, according to financial experts, prove that the majority of investors hit by the tax are long-term savers, trying to plan for their retirement.

Separate research undertaken for The Daily Telegraph, by the accountancy firm Blick Rothenberg, demonstrated the longer a person holds an asset, the more likely they are to be taxed on an "illusionary" gain because of the effect of inflation.

The last time CGT was as high as 40 per cent, investors were given a substantial relief from the tax if they had been a long-term saver. The effect of the relief was to strip out the effects of inflation.

Blick Rothenberg has calculated that more than £4 in every £10 of CGT a long-term property investor has to pay is purely as a result of inflation.

Of the total increase in value in property prices since 1990, 43 per cent is attributable to general inflation, based on the retail prices index, and 57 per cent is attributable to real growth in UK property over the 20 year period.

Frank Nash, a partner at the firm, said: "Unless allowances for inflation are also built in, or gains are tapered for long-held assets, then nominal and not just real capital gains will be taxed. If the proceeds from the sale of assets are taxed on an amount greater than real gains, this is a form of double taxation."